Rewriting Hog Price History

What a difference two weeks can make! My trip to Brazil last week and the associated e-mail challenges prevented my column about record-high hog prices from reaching the North American Preview editors. Too bad, because it’s not often that one gets to write about record hog prices. And too bad, since we have now seen the second-largest one-week decline in hog prices on record! So this week’s column is a bit about both occurrences.

Arriving at the conclusion that the week of Aug. 16 saw a record for farm-level hog prices is not an easy exercise since there is no consistent price series that covers all of history – or even that part back to 1974-75 when hog prices made their last quantum shift. Figure 1 shows a constructed price series from the Livestock Marketing Information Center that uses Iowa-Minnesota practical top live weight prices up to the mid 1990s, and then uses carcass weight quotes to mimic that practical top series. I am not 100% positive that the $90.43 week before last is perfectly comparable to the $89.27 of the week of June 2, 1990, but it is as close a comparison as I know of, so I’m going with it.

“It’s a record high hog price!” Four such statements could have been made from 1973 to 1991, and now it has taken 17 years to make it again.

Why so many in the early period and then the long dry spell? The record prices of 1976 were the aftermath of the Russian grain deal and significantly higher corn prices in 1974 and 1975. Slaughter dropped from 81.7 million head in 1974 to just 68.7 million head in 1975 (Figure 2) and only recovered to 73.8 million head by 1976. The 1974 to 1976 supply decline was 10%. A 10% decline over two years in order to drive hog prices high enough to cover significantly higher feed costs. Does that sound familiar?

The next record, in 1982, came on the rebound side of the huge herd buildup in 1978 and 1979 that led to record slaughter in 1980. The 1980 slaughter record (which stood until 1995) drove hog prices into the $30s for the first time since the 1974 liquidation year and caused another dramatic reduction in supplies and a new record price.

It was nine years before hog prices would set another record, largely because of the demand difficulties of the 1980s. Fat phobia, cholesterol phobia and nitrate phobia were at the top of consumers’ minds and newspapers’ headlines and pork demand suffered. The University of Missouri’s pork demand index stood at 125.1 in 1979. Five years later, it stood at 100, meaning that the index had fallen by just over 5% per year.

By 1991, U.S. hog slaughter had still not recovered to the levels of 1981, but the “Pork: The Other White Meat” campaign and significantly higher promotional budgets funded by the mandatory checkoff (initiated in 1987) had stopped the erosion of pork demand. That combination drove hogs to their last record early in the summer of 1991.

It should be noted, though, that the 10-year period preceding that record (1980-1990) saw the largest reduction of producer numbers for any decade in history as 391,110 operations exited the pork industry. And in those days, each operation was generally an enterprise owned by one farmer – not just a physical location that is part of a larger enterprise as many hog operations are today.

Why has it taken 17 years to set another record? Three reasons:

Technological innovations from buildings to genetics to nutrition to management to records/analysis systems to economies of scale and size have allowed producers to consistently improve the efficiency of their operations. Back when per unit input prices were stable and relatively low, these efficiency gains resulted in cost reductions over time that allowed profits to be realized even as hog prices trended downward.

Consolidation of production into fewer hands also meant more pigs in each producer’s hands. This enabled producers to accept lower per-head margins and still generate enough profit to live comfortably.

Domestic demand has been stable, but not growing. I don’t mean to be critical in that point. A stable pork demand at a time when chicken demand was steadily growing and, at least through 1998, when beef demand was still falling is not too bad of a result. But output growth and stable demand will not often allow higher, much less record, prices.

2008 is Unique The uniqueness of the 2008 situation should be obvious: It is the only price record that has not involved some type of output reduction. In fact, this record has been set on an output increase of nearly 9%, year-to-date. The driver, of course, is exceptionally strong hog demand driven by meat exports and record by-product values.

Which brings us to last week and a near-record large drop in hog prices. The decline of $10.89/cwt. was second only to the $10.93/cwt. decline for the week of Sept. 8, 1973. Only two other weeks, one in December 1975, another in December 2004, have seen declines of over $10/cwt.

Why the big fall? It’s not a supply issue. Slaughter last week was still over 5% larger than last year. Since we have concluded that the upward run was likely driven by export demand, this slowdown is almost surely driven by declines in export demand. We will not have data for August until mid-October, so it will be interesting to see whether this is the case or not, and if it is, to see where the exports have fallen the most. I have always been a bit concerned about post-Olympics China, but difficulties in Mexico and Russia will also contribute to the decline. Aren’t roller coaster rides fun?